Wednesday, January 29, 2014

In the past week, I have seen commentary from various technical analysts indicating that gold stocks appeared to have bottomed and poised to rally. I took a look and concurred with the assessment. However, I feel slightly uneasy about going long gold stocks at this stage despite the positive technical backdrop because this group tends to be slightly negatively correlated to the stock market and the major averages have fallen very fast and very quickly in a very short time.

Further analysis of gold stocks also suggest that they may have rallied too far and have become overbought. So let me suggest a more risk-controlled way of playing the metal and hard asset rebound theme: Buy metal and mining and short gold miners:

The above chart of this pair (XME vs. GDX) shows that metal and mining stocks relative to gold stocks. With the exception of a brief period last August, XME has been in a steady relative uptrend since late 2012. Now that GDX has staged a relative rally, this relationship has settled back to the bottom of the range, this may be a fairly low-risk entry point for the long XME/short GDX trade.

Needless to say, if you were to put on such a trade, keep a tight stop in case gold stocks continue their relative rally.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

Looks plausible to me. Another intriguing pairs play might be to go long MW and short JOSB as JOSB may be bluffing in its reported attempt to acquire Eddie Bauer. Both look double toppy on a monthly chart and both charts are quite similar in their recent gap gains although MW has almost doubled and JOSB has not gained nearly as much.$54.86 is the supposed magic number that JOSB is worth. We all know the history of the acquiring company usually ends up losing value, because generally, the acquiring company's stock will fall while the target company's stock will rise. I have a gentlemen's bet with the wife taking the 2 1/2 points from Denver.

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Welcome to my blog Humble Student of the Markets. These are my observations and musings about the markets (mostly equities), hedge funds and investments in general.My experience has been a quantitative equity manager in US, Canada, EAFE and Emerging Markets and commentator on hedge funds and their returns patterns.

DISCLAIMERThis is not investment advice! I know nothing about you, your risk preferences, your portfolio or your investment horizon. I have no idea whether any of my opinions expressed are suitable for you.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. I may hold or control long or short positions in the securities or instruments mentioned.